Winnowing the Field
If nonprofit colleges and universities had been subjected to the same regulatory red tape in their early years as for-profit institutions have been recently, the sector would not have survived, argues William G. Durden.
June 15, 2017
A 2015 New Yorker article, “The Rise and Fall of For-Profit Schools,” by James Surowiecki, is an excellent example of media commentary outlining the precarious position of the entire sector of for-profit institutions. And while a number of for-profit universities have been cited for transgressions, the collapse of Corinthian Colleges (the second-largest for-profit chain in 2010), due primarily to pressure from the U.S. Department of Education, stands as the bellwether of the sector’s clouded future — only to be followed by the U.S. Department of Education’s barring of ITT Tech from enrolling new students who receive federal aid and its increased financial oversight of that institution.
The Trump administration is generally thought to be more favorable toward for-profit institutions due in part to a general understanding of the need and use of private capital in education and to President Trump’s pronounced antipathy toward regulations in general, the removal of which would benefit for-profit colleges. It is early in the administration, however, and the full extent of change is to date unrealized despite yesterday’s announcement about the administration’s intended plans to suspend or renegotiate two primary regulations, borrower defense and gainful employment. These steps could be interpreted as the beginnings of relaxed federal scrutiny of for-profit universities, arguably removing a layer of protection from students and their families who are lured into significant debt and unrealizable job placement promises by unscrupulous marketing practice and misrepresentation.
Is censure of for-profit higher education warranted? Yes, in part. Some questionable educational institutions have been practicing under the legal structure of a for-profit. The condemnation, however, should not be applied in a blanket manner. Federal regulations should not be used to target without discrimination an entire sector made up of a wide variety of institutions with differing purposes and performance. Such regulations should not, in the name of protecting students, actually become a blunt instrument to eliminate an entire sector of higher education because of disagreement about the definition and resulting implications of purpose arising from the tax status of a college or university.
There are good players among for-profit institutions — those with integrity that want to use private capital to advance student success while also potentially making a profit. That important fact is lost in the dedicated pursuit to universally condemn an entire sector through regulation and contrast it with nonprofit higher education, generally viewed as a pillar of virtue.
Certainly, the latter is experiencing growing criticism for not delivering value for investment and creating obstacles to access and affordability. And it is not absent a variety of other compromising touch points, including inadequate sexual assault procedures, transgressions of academic freedom and free speech, financial misuse, and medical malpractice. Yet, unlike for-profit education, it escapes universal castigation as a sector of higher education irretrievably fraudulent and worthy of dissolution.
The Lessons of History
In a free-market-driven society, whether we are talking about businesses or educational institutions, the survival of the fittest — often defined as quality of product and wealth — is operative and a powerful corollary to external regulation. In the education sphere, however, integrity and a higher purpose are also integral to survival. Higher education is rightfully expected to improve lives in a variety of profound ways — intellectually, ethically and financially. Institutions that are most adaptable to the honest ambitions of their audience, employ outstanding and empathic leadership, adhere to shared sector standards, and honor their mission will survive. Those that constantly fall short of expectations, performance and demand will fail.
This winnowing of the field occurred, for example, in the first few decades of nonprofit colleges in our country during a period absent federal regulation. An appreciation of the history of higher education in the United States is instructive. Colleges in the early period of American education were often a sorry lot by today’s social and academic standards. Financial instability was rampant, and the academic bar was low — even at institutions that have over the centuries been elevated to top-tier status.
For example, Dickinson College, my alma mater and where I was president for 14 years, is considered — and rightfully so — a prestigious liberal arts college. Founded as a grammar school in 1773, it introduced in 1798 a 10-month degree program at the insistence of impatient students who did not want to waste time studying too long (yes, even in the 18th-century, higher education succumbed to consumerism). The result was disastrous, and the degree was ultimately rescinded. According to Charles Colman Sellers in Dickinson College: A History (1973), graduates “lost standing among other college graduates and employers.” In modern terminology, market forces led to the quick demise of the program. A longer course of study was quickly reinstated.
Such early growing pains are not isolated events, and many of today’s nonprofit colleges and universities will find such questionable moments in their early histories. In fact, institutional instability and the resultant anxiety among students as to whether their college would exist from year to year were rampant. According to John R. Thelin, Jason R. Edwards and Eric Moyen in Higher Education in the United States, “Between 1800 and 1850, the United States experienced a ‘college building boom’ in which more than 200 degree-granting institutions were created. However, since most of these new colleges depended on student tuition payments and local donors, there was also a high closure rate and the schools that did survive typically struggled from year to year.” Dickinson, for example, closed twice in its early history, only to reopen and ultimately flourish.
The separating of the wheat from the chaff that occurred as a natural development process for nonprofit higher education is now happening to for-profit universities emerging from their respective early boom period in the 1990s and early 2000s. The only difference, and it is a crucial one, is that the whole sector of nonprofit institutions was not subjected to annihilation — much of it from blanket, indiscriminate governmental regulations — as is arguably the case with today’s for-profit universities. If nonprofit universities were subjected to the same undifferentiated pressures and universal condemnation in their early years as for-profit universities have been in recent decades, the sector — now considered arguably the best in the world — would not have survived.
Yet there appears to be no recognition of this developmental process in the condemnation of for-profit colleges and, thus, no attempt to permit good players to go to their next stage of development and service. For-profit institutions that are “good soldiers” haven’t been allowed to learn from their early successes and failures like those nonprofits that survived centuries ago. Instead, heavy-handed and indiscriminate regulations have been imposed upon them as a sector, thus arguably diverting much of their energies from educating students to managing existential threats.
Two Heavy-Handed Measures
Two categories of federal regulations introduced during the Obama presidency that the Trump administration plans to reset deserve closer examination.
Gainful-employment regulations. While very much targeted at the for-profit higher education sector, these Obama-era regulations actually apply to some nonprofit programs — specifically, non-degree-level programs (e.g., certificate and continuing education programs at community colleges), as well as some of the continuing education programs at public institutions. To be in compliance with the regulations, institutions need to demonstrate that their graduates from each academic program have debt that doesn’t exceed 20 percent of their discretionary income or 8 percent of their total earnings. The Higher Education Act statutory language uses the phrase “an eligible program of training to prepare students for gainful employment in a recognized occupation” for first-degree students in two places. The first is in the definition of proprietary institution (i.e., for-profits), and the second is for vocational programs at nonprofit institutions.
The Higher Education Act was written decades ago (in the mid-1960s) and, while updated through reauthorization every six to 10 years, it still includes outdated language and policies. Among those is the language on gainful employment, which focuses exclusively upon institutions providing training for vocational, entry-level jobs.
Now, decades later, the Education Department has decided to define the term “gainful employment” through regulation, using a debt-to-earnings metric. Those regulations apply to all for-profit institutions and programs, even though many in the sector have expanded academic programs well beyond vocational and entry-level training.
For example, earning a master’s or doctoral degree in nursing or education might be important to a person’s career advancement and benefit those served, but that advancement isn’t necessarily demonstrated through an income increase as an immediate result of the degree. In contrast, the relationship of debt assumed in order to acquire a certificate or associate degree for an entry-level job in welding, cosmetology or auto mechanics and the amount earned at that entry level could still be significant, as assumed decades ago in the Higher Education Act.
When the legislation was first written, no one contemplated that today there would be degree-granting for-profit institutions offering bachelor’s and graduate degrees with outcomes on par or better than numerous of their nonprofit peers, as well as the same multiple accreditations by regional and professional agencies as those same peers. Nevertheless, the outdated regulations apply indiscriminately even to institutions displaying excellence indicators on issues such as student debt that are as good as or better than many nonprofit institutions
Borrower defense-to-repayment regulations. These Obama administration measures establish new ways by which borrowers can seek repayment when harmed by an institution. They also include new regulations on financial responsibility, such as a more stringent and arbitrary imposition of letters of credits on institutions (both for-profit and nonprofit), and yet another new loan-repayment rate requirement applicable only to for-profit institutions. The imposition of new forms of loan recoupment and of new financial responsibility standards and letters of credit puts both smaller nonprofit institutions and larger for-profit institutions at unnecessary risk. There are several enforcement tools — including existing letter of credit requirements and timed disbursements of aid — that already exist to protect students’ access to Title IV funds, which if used correctly do not jeopardize their institutions’ very existence, as these regulations would.
It is also unclear about the intrinsic value to students of a new loan repayment rate (and warning requirement) that is applicable to only one set of institutions based on tax status. What is perhaps of even more interest is that this is the third rate the Education Department has created in recent years, each with a different methodology. Important in this context is to note the widely published observation that the department erred significantly on the College Scorecard loan repayment rate — by 20 percentage points on average.
The defense-to-repayment and financial responsibility regulations would apply across higher education, but the expectation is that they would hit the for-profit sector harder as financial wrongdoing is erroneously thought to be purview solely of this sector of higher education.
These two new or redefined regulations have seemed sure to create — until the intervention now of the Trump administration — unworkably vague and subjective standards of compliance that unfairly target predominately for-profit institutions. They serve arguably as instruments to force the dissolution of the entire sector, as they are applied without differentiation as to mission or performance among all institutions within the tax status of for-profit.
For-profit and nonprofit colleges and universities that practice fraudulent behavior, that misrepresent themselves to their students and do not deliver a substantive education matching their stated mission, should be shut down using a combination of external regulations, internal sector accreditation and market forces.
But indiscriminate condemnation and external federal regulation seemingly to eliminate an entire sector of education on the basis of often unarticulated motivation are severely misguided. And most important, they drastically limit educational choice among those students with ambition and a wide variety of needs.
For-profit higher education as a sector should be permitted the same winnowing process of separating the wheat from the chaff as occurred with the nonprofits. Anything less represents a seeming radical transgression of our free-market system that has historically permitted good practices, useful “products” and innovation to emerge from particular institutions in a sector over time, regardless of the tax classification to which they collectively belong.